by Koyomiyoshi

According to this article , the Obama administration has proposed a pay limit to financial firms which will be saved by government TARP plan.  This plan clearly reflects public outrage towards financial firm‘s practice of paying tremendous bonus to CEOs, which have been saved by taxpayers. Outrage centres around the fact that these bonus are excessively high in comparison to CEOs performance. The article introduces one wall street veteran saying “I could put a monkey in that chair and get a certain level of business.”

However, work performance does not necessarily depend on worker effort. You sometimes fail to improve work performance despite your effort, while your neighbour seems to always succeed without so much effort. A third person, or employer, cannot always distinguish your performance has been caused by effort or misfortune.  A monkey may,
sometimes, show high performance, but it may be because he is  just lucky. This article points out that the plan may discourage some able banker from working and encourage them leaving firms.

How can we design a pay system which can purge lucky monkeys and reward able workers simultaneously? According to Ferrall and Shearer, optimal incentive pay systems are too costly to implement. The employer needs keep track of all required information and compute payment under the contract. According to their estimation based on mine worker contracts, actual contract system performs ill, one-third to full information settings.

Monetary rewards does not necessariliy improve worker’s performance. Heyman and Ariely‘s experiment to compare which of following three payment method improve performance, middle payment, low payment, and no payment. Surprisingly,  individuals with low payment performed worst. According to Dan Pink, the group whose pay depends on time took in solving the problem take longer than the group whose pay does not depend on solving time. These experiments have been performed in the U.S. and India. Not dependeing cultural differences, The result seems robust.  This tendency is seen on only in intelectural tasks.

square-eye Ferrall and Shearer ” Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records”

square-eye Heyman and Ariely “Effort for Payment”